Japan Faces Headwinds With Sakhalin-2 Procurement

Japan is coming under increasing Western pressures to halt its Russian LNG imports that could pose risks to its continuing procurement from the Sakhalin-2 project in Russia’s Far East.

Despite reputational risks, Japanese buyers have continued lifting cargoes under their term contracts at Sakhalin-2 after the 2022 Ukraine crisis as long as they are legally allowed and supported by Tokyo and Washington.

Sakhalin-2 is currently not subject to sanctions, unlike Russia’s Arctic LNG-2 project, which has been facing US sanctions since late 2023. Japan does not lift any cargoes from Arctic LNG-2 despite being entitled to almost 2 million tons per year of equity offtake for a 10% stake held jointly by state-backed Jogmec and trader Mitsui. Sakhalin Energy, 77.5%-controlled by Gazprom, is the operator of Sakhalin-2.

A key indicator for Sakhalin-2 will be an imminent decision by the US Treasury on whether to renew a six-month waiver for Japan. The Office of Foreign Assets Control’s general license that authorizes Japan to conduct transactions with Gazprombank, which is under US sanctions, for imports from Sakhalin-2 project is set to expire on Dec.19. The waiver is usually renewed every six months.

When US President Donald Trump met Japanese Prime Minister Sanae Takaichi in October, he had asked the latter to join an embargo to ban energy imports from Russia, to which the Japanese leader had pushed back, citing Japan’s concerns with its energy security. Sakhalin-2 accounts for around 8% of Japan’s total imports.

Despite the growing pressures on Japan, buyers are optimistic that the waiver will be extended. “Buyers are a bit worried, but they think it will be extended,” said one of them, adding Japan’s Ministry of Economy, Trade and Industry has provided assurances to buyers. Sources note there are alternative payment routes other than transacting with Gazprombank.

Japan has chosen to retain its Sakhalin-2 equity stakes, which are held by Mitsubishi and Mitsui, and continue lifting term cargoes. In addition to energy security reasons, Japan is also wary of financial liabilities if it chooses to halt imports and believes that any halt would lead Chinese and Indian buyers to benefit from cheaper cargoes from Sakhalin-2. The share of Sakhalin-2 exports to China has grown from 14% in 2020 to 24% this year, Kpler data shows.

But the EU’s recent decision to ban long-term Russia LNG deals from January 2027 and phase out long-term Russian piped gas deals by end-September 2027 as well as a planned UK ban for provision of maritime services for Russian LNG exports in 2026 are complicating Japan’s calculus for Russian procurement.

Sakhalin-2 Contracts

Among Japan’s term contracts with Sakhalin-2, the first contract that expired was Jera’s 500,000 ton/yr deal, formerly signed by Chubu Electric, which is understood to have lapsed at end-March 2025.

To replace the expired volume, sources speculate Jera may have increased the volume of its other 1.5 million ton/yr contract with Sakhalin-2.

Jera’s nonrenewal may set a precedent for other Japanese buyers. The next contract to expire would be in 2028.

With Brent at $61 per barrel, f.o.b term cargoes from Sakhalin-2 are estimated to be priced at around $8.10 per million Btu based on a 13.3% oil slope in term contracts and slightly more for ex-ship delivered contracts, which are more competitive than current Asian spot prices. But spot prices are widely expected to start easing starting from 2026-27, which would potentially make spot cargoes more competitive than oil-linked cargoes.

Although the exact timing of the UK’s planned ban on maritime services remains uncertain, several vessels lifting from Sakhalin-2 rely on UK-based insurers who dominate the global protection and indemnity insurance market, and the looming ban, to be phased in over 2026, has already caused concern among Japanese buyers.

Japan hopes to keep imports going for as long as possible amid improving likelihood of a Russia-Ukraine peace deal, a local analyst notes. Sources are also wary that Europe may see a spike in its gas prices in 2027, should the EU implement its bans on all Russian gas imports.

Nonetheless, some buyers acknowledged the geopolitical environment is making it more difficult to extend contracts with Sakhalin-2, whether short- or long term. “We need to be concerned and check the situation every time,” said the source.

China’s Presence Grows

The nonrenewals by Jera as well as Taiwan’s CPC, whose contract expired in March 2022, have led to more uncontracted cargoes and created an opening for Chinese buyers to buy on a spot basis.

China is set to become a new term buyer of Sakhalin-2. PetroChina is heard to have signed a five-year contract with Sakhalin-2 for one cargo each month, which would begin deliveries in 2026, market sources say. The contract is believed to be priced at an oil slope of around13%, comparable with the 13.3% of Japan Crude Cocktail for Japanese buyers.